What is asset disposal?

Businesses dispose of assets to upgrade older equipment, because technology or regulation has made it obsolete, because repair and holding costs now exceed the cost of replacing it, at the end of its useful life or a lease, or because the business has changed direction. Disposal decisions affect cashflow, your tax position and capital budgeting, so they are best lined up with replacement plans and your depreciation policy.

The method matters. A sale brings in cash or a receivable. A trade-in credits the old asset's value against a new one, with the trade-in allowance on the supplier's paperwork treated as the proceeds. Scrapping or abandonment brings no proceeds and usually leaves a loss equal to the carrying amount. A donation is treated the same way unless something is received in return.

Under the AASB rules for derecognising property, plant and equipment, you take the asset's carrying amount (cost less accumulated depreciation) off the books, recognise any proceeds, and record the difference in profit or loss. Four steps: remove the original cost from the asset account, remove the accumulated depreciation, recognise the proceeds as cash or a receivable, then book a gain if proceeds exceed the carrying amount or a loss if they fall short.

A fully depreciated asset scrapped for nothing has no profit or loss effect; you simply clear the cost and the accumulated depreciation. If it is sold, the whole proceeds are a gain. Post the entries in the reporting period the disposal happens and update the asset register at the same time, otherwise future depreciation runs will be wrong.

When you dispose of, or stop using, a depreciating asset the ATO requires a balancing adjustment in that income year. Compare the termination value (the money received or the market value of what you got, including any trade-in allowance) with the asset's adjustable value (its cost for tax less the decline in value already claimed). A positive difference is assessable income; a negative one is a deduction. Where the asset was lost, destroyed or compulsorily acquired, the involuntary disposal rollover can offset that adjustment against a replacement asset by reducing the replacement's cost, subject to the ATO's conditions.

If you are GST-registered and the sale is a taxable supply, charge GST on the sale price, issue a tax invoice where required and include it in the BAS for that period. Keep the sale agreement, invoices and proof of the payment date, and line the disposal up with any asset finance you need for the replacement.